Europe in Limbo as Asian Fear Rises

The situation in Europe continues to focus on the debt and growth, along with the funding. And, until it calms down in Europe, markets will likely remain shaky on this side of the Atlantic.

There is talk that Greece may need to leave the European Union due to its failure to satisfy financial targets set in place as a condition for receiving emergency capital from its European neighbors. I thought this could be a possibility given that I did not believe that the stronger nations of Germany and France would want to continue to fund the poor countries. The reality is that growth in both Germany and France has suffered with the focus squarely on saving the PIGS (Portugal, Ireland, Greece, and Spain).

In my global economic analysis, this trend cannot continue much longer or Europe will falter and fall into a deeper or new recession. The problem is that ousting Greece would not be viewed as a positive signal to the rest of the world, as it could signal a domino effect that could lead to other countries also leaving, which is not what you want to see.

The European Central Bank (ECB) maintained its benchmark lending rates at 1.50% at the Thursday meeting. But the situation is cloudy in the eurozone, after the ECB cut its gross domestic product (GDP) growth forecast. Of course, this is not a surprise given the recent downgrades in Europe.

Morgan Stanley cut its global GDP forecasts for 2011 and 2012 and added that the U.S. and the eurozone were “dangerously close to a recession.”

UBS and Citigroup cut the forecast for global and domestic GDP growth, but added that another recession was unlikely. Please note that “unlikely” still means it could occur.

While Europe tries to sort out its mess, which could take some time, there are also issues in Asia. Any major issue there could devastate global stock markets.

In Asia, Fitch Ratings warned that it may downgrade the credit rating of China within two years, as the Chinese economy faces high inflation, stalling growth, and financial system risk.

UBS cut China’s GDP to nine percent this year from the previous 9.3% and to 8.3% in 2012 from nine percent. While the cuts are not major, it does indicate stalling in the massive Chinese economic engine. This is something that we do not want to see, as weakness in China will impact Chinese exports. Slowing also indicates less foreign demand for Chinese goods, suggesting slowing global demand.

Japan was also mentioned as a possible downgrade due to its massive debt load and an economy that has been comatose for several decades. The country’s credit rating was just downgraded to Aa3 from Aa2 by Moody’s due to slow growth and credit issues.

So not only do we have to deal with the U.S. debt and deficit, but also the impact from slowing European growth and potential problems in China and Japan make the current situation worrisome.